PennantPark Floating Rate Capital Ltd. (PFLT) Q2 2014 Earnings Report, Transcript and Summary

Good morning and welcome to the PennantPark Floating Rate Capital’s Second Fiscal Quarter 2014 Earnings Conference Call. At this time, all participants have been placed in a listen only mode. The call will be open for a question-and-answer session following the speakers’ remarks. [Operator Instructions]. As a note, today’s call is being recorded. It is now my pleasure to turn the call over to Mr. Art Penn, Chairman and Chief Executive Officer of PennantPark Floating Rate Capital. Mr. Penn, you may begin your conference.

Thank you, and good morning, everyone. I’d like to welcome you to PennantPark Floating Rate Capital’s second fiscal quarter 2014 earnings conference call. I’m joined today by Aviv Efrat, our Chief Financial Officer. Aviv, please start off by disclosing some general conference call information and include a discussion about forward-looking statements.

Thank you, Art. I’d like to remind everyone that today’s call is being recorded. Please note that this call is a property of PennantPark Floating Rate Capital and that any unauthorized broadcast of this call in any form is strictly prohibited. Audio replay of the call will be available by using the telephone numbers and PIN provided in our earnings press release. I’d also like to call your attention to the customary Safe Harbor disclosure in our press release regarding forward-looking information. Today’s conference call may also include forward-looking statements and projections and we ask that you refer to our most recent filling with the SEC for important factors that could cause actual results to differ materially from these projections. We do not undertake to update our forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our website at www.pennantpark.com or call us at 212-905-1000. At this time, I’d like to turn the call back to our Chairman and Chief Executive officer, Art Penn.

Thank you, Aviv. I’m going to spend a few minutes discussing current market conditions, followed by the discussion of investment activity, the portfolio, the financials, our overall strategy, and then open it up for Q&A. As you all know, the economic signals have become positive, with many economists expecting a slowly growing economy going forward with regard to the more liquid capital markets and in particular the leverage and high yield markets. Those markets remain strong due to substantial cash flows and high yield funds leverage loan funds and CLOs. Risk award in the middle market has generally remained attractive as the overall supplied no market company unique financing exceeded the relative demand of applicable and incapacity. And debt investors and lenders a slow growth economy is fine as long as we have underwritten capital structures prudently. The healthy current coupon with deleveraging from free cash flow over time is a favorable outcome. We continue to be selective about which investments we make in this environment given our strong origination network and the size of our company, we believe we can continue to prudently grow. We remain primarily focused on long-term value and making investments that will perform well over several years and can withstand different business cycles. We continue to set high bar in terms of our investment parameters and remain cautious and selective about which investments we add to our portfolio. Our focus continues to be on companies or structures that are more defensive, have low leverage, strong covenants and high returns. As credit investors, one of our primary goals is preservation of capital. If we preserve capital, usually the upside takes care of itself. As a business, one of our primary goals is building long-term trust. Our focus is on building long-term trusts with our portfolio companies, management teams, financial sponsors, intermediaries, our lenders and of course our shareholders. We are first called for middle-market financial sponsors, management teams and intermediaries, who want consistent credible capital. As an independent provider, free of conflicts or affiliations, we have become a trusted financing partner for our clients. Since inception, PennantPark entities have financed companies backed by a 136 different financial sponsors. We have been active and are well positioned. For the quarter ended March 31, 2014, we’ve invested $60 million with an average yield on debt of 8.3%. Core net investment income was $0.28 per share before accrued but not payable incentive fees. As a result, our focus on high quality companies, seniority in the capital structure, floating rate assets and continuing diversification, our portfolio is constructed to withstand market and economic volatility. The cash interest coverage ratio, the amount by which EBIDTA or cash flow exceeds cash interest expense continues to be healthy at 3.6 times. This provide significant cushion to support stable investment income. Additionally, add cost, the ratio of debt-to-EBIDTA on the overall portfolio was 3.5 times, another indication of prudent risk. We currently have non-accruals in the portfolio. In terms of new investments, we had another active quarter investing in attractive risk-adjusted returns. Our activity was driven by mixture of M&A deals, goal financings and refinancings. And virtually all of these investments, we have known these particular companies for a while, have studied the industries or have a strong relationship with the sponsor. Let’s walk through some of the highlights. We invested another $3.7 million in the first lien term loans of AKA Diversified. We did a Verizon Wireless premium retailer based in the Midwest. Atlantic Street Capital is the sponsor. A [inaudible] provides online testing, assessment tools and vocational solutions in the nursing health public health and financial services industry. We purchased 3 million of the first lien term loan equity is the providence [ph] equity is the sponsor. JA Cosmetics is a multichannel beauty company. It operates under the brand E.L.F with cosmetics and tools at value retail prices. We purchased 4 million of the second lien term loan. GPG is the sponsor. [inaudible] that’s the largest independent direct mail company in the U.S. We purchased 10 million of the first lien is the sponsor. We invested 5 million in the first lien term loan of premier dental. Premier dental is one of the largest dental services organizations in the U.S. and Capital is the sponsor. Turning to the outlook we believe that the remainder of the 2014 will continue to be active due to both growth and M&A driven financings due to our strong sourcing networks and client relationships we are seeing active deal flow. Let me turn the call over to Aviv our CFO to take us through the financial results.

Thank you, Art. For the quarter ended March 31, 2014, recurring net investment income totaled $0.27 per share. In addition, we had $0.01 per share of other income. We accrued $0.03 per share of incentive fee expense for GAAP purposes only, which is not payable to the advisor. As a result, GAAP net investment income for the quarter was $0.25 per share. Looking at some other expense categories, management fees totaled 2.4 million including 300,000 of incentive fees accrued but not payable. General and administrative in tax expenses totaled about $600,000 and interest expenses totaled $1 million. During the quarter ended March 31st, net unrealized appreciation from investments was approximately $3 million or $0.21 per share. Realized gains were $500,000 or $0.03 per share, and dividends in excess of income was $300,000 or $0.02 per share. Consequently, NAV was up $0.22 per share from $14.24 to $14.46 per share. Our entire portfolio and our credit facility are mark-to-market by our Board of Directors each quarter using the exit price provided by an independent valuation firm or independent broker dealer quotations, when active markets are available under ASC 820 and 825. In case where broker dealer quotes are inactive, we use independent valuation firms to value the investments. Our portfolio is relatively low risk. It is highly diversified with 87 companies across 23 different industries. 88% is invested in first lien senior secured debt, 8% in second lien secured debt, 4% in subordinated debt and equity. Our overall debt portfolio has a weighted average yield of 8.1%. 94% of the portfolio is floating rate, including 92% with floor and 6% is fixed rate. The average LIBOR floor is 1.2%. Now, let me turn the call back to Art.

Thanks, Aviv. To conclude, we want to reiterate our mission. Our goal is a steady, stable and protective dividend stream, coupled with the preservation of capital. Everything we do is in line with that goal. We try to find less risky middle-market companies that have high free cash flow conversion. We capture that free cash flow primarily and first lien senior floating rate debt instruments and we payout those contractual cash flows in the form of dividends to our shareholders. In closing, I’d like to thank our extremely talented team of professionals for their commitment and dedication. Thank you all for your time today and for your investment and confidence in us. That concludes our remarks. At this time, I would like to open the call to questions.

Thank you. [Operator Instructions]. And first we’ll hear from Greg Mason from KBW. Greg Mason – KBW: Hey good morning guys. I wanted to first talk about the nice appreciation in a portfolio. Are there any specific companies that led to large portion of that or was it just general pricing up in the portfolio?

It was general pricing in the portfolio. We’d like to probably highlight a [inaudible] as a leader in that if you follow PNNT that’s had some nice appreciation recently in both portfolios. Greg Mason – KBW: Okay, great. And then if we look at virtual radio logic that’s going to be the only one that’s been showing a little bit of stress here in the portfolio in the past. Can you give us some update there and just any thoughts on that business?

It’s a good question. We continue to evaluate do we sell it position is relatively small in the mid-60s do we hold on to it? Can we get a higher price later on? Does it get back to par? The general cone around that credit has been mildly more positive recently. So today we haven’t sold that possession. But you should know that we could turn around tomorrow and saw that position and don’t have to worry about it but we’re trying to figure out what the best way to maximize shareholder value is with that particular position and we evaluate it at all the time. Greg Mason – KBW: Okay, great. And then just one kind of modeling question, what is your average LIBOR for this year? I believe it was 1.2 last quarter?

I think it’s 1.2 yeah 1.2%. Greg Mason – KBW: Okay. All right. Great. Thanks guys.

Thanks, Greg.

Next we’ll hear from Chris York with JMP Securities. Christopher York – JMP Securities: Good morning guys. Thanks for taking my questions. PennantPark’s results yesterday included a couple of investments to companies in Europe. Do you expect your investments to make its way to PennantPark senior?

It’s a good question. We hope so, we hope so. Right now they would primarily higher yielding investments just an information fact our financial vehicle our credit facility did not take Western Europe as collateral. So to the extent there are Western European deals that have an interesting risk reward that we don’t need leverage to get a very attractive return, they would probably find their way into PFLT at this point. Over time, we hope that we can get our SPV our financing vehicle from PFLT to take certain European collaterals. So that’s a work in progress but for sure, some of that opportunity to roll into PFLT. Christopher York – JMP Securities: That’s interest. So that kind of correlates into my second question here. You have about 27 million in capacity on your SunTrust revolver. Would you have discussions or you thinking about discussions of expanding that capacity and potentially including the ability to pledge investments spend will be down the side Western Europe?

It’s great question. Certainly the European question is certainly on the docket and again we will only do it jurisdictions in Western nor Northern Europe where we feel comfortable that the bangers creditors, rise a racial mark to those in the United States. Frankly in terms of size, we don’t need much more size of any size at this point given that our equity is growing nicely because of honeybee growth which we love of course from raking additional equity given that the stock is trading below book value. So if we ever able to raise additional equity above book value at that time we will consider increasing the amount of debt. Christopher York – JMP Securities: Got it. That’s it for me. Thanks.

[Operator Instructions]. At this time, I’m showing no further questions. I’d like to turn the conference back over to Mr. Penn for any additional or closing comments.

Well, I just want to thank everybody for participating on the call today. And for focusing on PFLT we will be out there with our quarterly earnings in early August and we look forward to chatting with you then. Thank you very much.

And that does conclude today’s conference. We thank you for your participation.